Mid Cap Fund

Manager Commentary as of 06/30/10

The equity markets experienced a sharp decline in the second quarter due to increased concerns over global economic growth and the sustainability of an economic recovery.  This was the first significant correction in the market since the bottom in March of 2009; the markets are now down midway through 2010. The Buffalo Mid Cap Fund declined 10.01% in the quarter, nearly equal with the 10.20% decline of the Russell Midcap Growth Index and slightly worse than the 9.88% decline of the Russell Midcap Index.  Year to date, the fund is down 1.47%, performing better than the benchmarks down 3.31% for the Russell Midcap Growth Index and down 2.06% for the Russell Midcap Index.

Data represented reflects past performance and is no guarantee of future results. The investment return and principal value of an investment will fluctuate so that an investor's shares, when redeemed, may be worth more or less than their original value. Current performance may be lower or higher than the performance quoted. Performance current to the most recent quarter end may be obtained by clicking here. Performance current to the most recent month end may be obtained by clicking here.

In the quarter, positive sector allocation was offset by negative stock selection.  Sector allocation was a positive as we were underrepresented in the three worst-performing sectors in the benchmark, namely energy, materials and industrials. All sectors declined in the quarter with the exception of telecom services, which is a small weighting in the benchmark.  Our stock selection was worse than the index in the industrials, consumer discretionary and financial sectors.  This was somewhat offset by positive selection in materials, consumer staples and technology.  Within industrials, our exposure to the for-profit education sector hurt our performance in the quarter, as increased regulatory scrutiny and uncertainty trumped continued strong earnings and cash flow performance from the companies.  In the consumer discretionary sector, our investments in retailers generally performed poorly due to concerns about the strength of the economic recovery and state of the consumer. We have maintained our investment exposure in both sectors.

Given the increased concern over the strength of the global economy, companies with good long-term, secular growth prospects generally outperformed companies with greater economic sensitivity, regardless of valuation.  Our top contributors in the quarter included Akamai Technologies and NetApp in the technology sector; Chipotle Mexican Grill and Lifetime Fitness in the consumer sector;  Pharmaceutical Product Development in the health care sector. Some of the biggest detractors included for-profit education companies Career Education and ITT Educational Services, asset manager Janus, and more economically sensitive stocks such as retailers Chico's FAS and Abercrombie and Fitch.  

We used the market decline in the quarter to continue to invest the inflows we have been receiving over the past year.  The fund ended the quarter with roughly ten percent cash and 49 stocks in the portfolio versus nearly 11 percent cash and 46 stocks at the beginning.  Inflows into the fund continued strong in the quarter and we put quite a bit of money to work despite cash dropping by only one percent of the portfolio. We are not "market timers" specifically, but we do pay close attention to valuation and try to be disciplined about the price we pay for specific securities.  Although we do share many of the market's concerns regarding the magnitude and sustainability of the recovery, we now feel that valuations are such that reasonable returns are achievable given the commensurate risks.  Companies' balance sheets are very healthy and cash flow generation is strong despite below normal levels of economic activity. This makes stocks look attractive to us relative to other low yielding alternatives.

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"Although we do share many of the market's concerns regarding the magnitude and sustainability of the recovery, we now feel that valuations are such that reasonable returns are achievable given the commensurate risks."